Economics - II : Previous Year Questions (2020)

PART – A

Q1. Define Exchange Rate.

Ans. Foreign Exchange (Forex) / Exchange rate refers to the conversion of one country's currency into another. It represents the price of one currency in terms of another, such as the number of Indian Rupees required to buy one US Dollar.

It facilitates international trade, investment, and travel, with rates fluctuating frequently based on market demand, interest rates, economic performance, and stability.

Q2. What is Globalisation?

Ans. Globalisation is the process of integrating a nation's economy with the world economy. It involves the conscious movement towards greater interaction with other countries through the removal of barriers to trade and investment.

Q3. What do you understand by poverty?

Ans. It is a situation wherein a person is not able to fulfil basic requirements or necessities of life. For e.g.: food, education, shelter, clothing, health, drinking water etc.

Q4. What is SLR?

Ans. Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.

A higher SLR forces banks to invest more in government securities rather than lending to the private sector, which helps control credit expansion.

Q5. What is business cycle?

Ans. Business cycles represent the rhythmic fluctuations in the overall economic activity of a country. These cycles are characterized by alternating periods of growth and decline in key economic indicators such as Gross Domestic Product (GDP), employment, and industrial production.

Q6. Define the Money market.

Ans. Money Market refers to short-term financial market of an economy. It deals in short-term financial transactions. (up to 1 year). It deals only in bonds (commercial bill, commercial paper etc.). General public participation is limited and RBI is the prime regulator.

Q7. What do you understand by financial inclusion?

Ans. Financial Inclusion refers to providing essential financial services (like small loans, savings, and insurance) to low-income individuals and marginalized groups who are typically excluded from the traditional banking sector.

Q8. What are Repo and Reverse Repo rates?

Ans. Repo Rate refers to the rate at which the RBI lends money to commercial banks for short-term periods against government securities.

Reverse Repo Rate refers to the rate at which the RBI borrows money from commercial banks, or effectively, the rate at which banks "park" their excess funds with the RBI.

Q9. Give two examples of barriers to trade.

Ans. Two primary examples of trade barriers are tariffs and import quotas. Tariffs are taxes imposed on imported goods, raising their prices to protect domestic industries. Import quotas are direct, physical limitations on the quantity of a specific good that can be imported over a certain period.

Q10. What do you mean by ad-valorem taxes?

Ans. The term "ad valorem" is Latin for "according to value". These taxes are calculated as a percentage of the assessed value of the item being taxed, such as a 12% GST on the price of a laptop.

PART – B

Q11. Differentiate between direct and indirect taxes and give examples.

Ans. The most common classification of taxes is based on whether the tax burden can be shifted from the original taxpayer to others.

Direct Taxes

A direct tax is one where the person who pays the tax to the government also bears the ultimate economic burden (incidence). The impact and incidence fall on the same person, and the tax cannot be shifted to others.

Examples Include: Personal Income Tax, Corporate Tax, Capital Gains Tax, and Wealth Tax.

• Merits:
  • Equity: Direct taxes are generally progressive, meaning they are based on the "ability to pay" principle.
  • Certainty: The taxpayer knows exactly how much they have to pay and when.
  • Civic Consciousness: Since people feel the pinch of direct taxes, they are more likely to monitor how the government spends their money.
• Demerits:
  • Evasion: High direct tax rates often lead to tax evasion and the creation of black money.
  • Inconvenience: The process of filing returns can be complex and time-consuming for taxpayers.

Indirect Taxes

An indirect tax is levied on goods and services rather than on income or profit. The person who pays the tax to the government (e.g., a shopkeeper) can shift the burden to the final consumer by including the tax in the price of the commodity.

Examples Include: Goods and Services Tax (GST), Customs Duty, and Excise Duty.

• Merits:
  • Convenience: They are paid in small amounts at the time of purchase, making them less burdensome to the taxpayer at once.
  • Broad Base: They cover everyone, including those whose income is below the direct tax threshold.
  • Discouragement of Harmful Consumption: High indirect taxes (sin taxes) can be used to discourage the consumption of harmful goods like tobacco and alcohol.
• Demerits:
  • Regressive Nature: Since the tax rate is the same for everyone regardless of income, it takes a larger percentage of a poor person's income than a rich person's.
  • Inflationary: They increase the price of goods and services directly.

Q12. Distinguish between Cost-push and Demand pull inflation.

Ans. Demand-pull inflation is a demand-side phenomenon, while cost-push inflation is a supply-side phenomenon. Key differences are as follows:

Q13. Highlight the role played by public sector in the Indian economy.

Ans. The public sector consists of various organizations owned, managed, and controlled by the government (Central, State, or Local). Its primary objective is not profit, but the maximization of social welfare and the provision of essential services.

Roles and Objectives

1. Infrastructure Development: The public sector invests in "long-gestation" projects where private capital is often hesitant to enter due to high risks and slow returns (e.g., Railways, National Highways, and Nuclear Power).
2. Correction of Regional Imbalances: By setting up industries in backward areas (as seen in the early Five-Year Plans with steel plants in Bhilai and Rourkela), the government ensures that economic growth is geographically inclusive.
3. Provision of Public Goods: Items like national defence, street lighting, and public parks are non-excludable and non-rivalrous. Since the private sector cannot easily charge for these, the public sector must provide them.
4. Control of Monopolies: To prevent the concentration of economic power in a few hands, the government manages strategic sectors (Atomic Energy, Space) and regulates essential services to protect consumers from exploitation.

Q14. Explain briefly the canons of taxation.

Ans. The "Canons of Taxation" are the fundamental principles or administrative criteria that a good tax system should follow. They serve as a blueprint for policy-makers to design taxes that are fair, efficient, and easy to manage.

Adam Smith’s Four Classical Canons

In his seminal work The Wealth of Nations (1776), Adam Smith proposed four famous canons that remain the foundation of modern tax policy.

1. Canon of Equity (or Equality)

This principle states that the subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities.

• Horizontal Equity: People in similar economic circumstances should pay the same amount of tax.
• Vertical Equity: People with greater wealth or higher income should pay more tax than those with less. This leads to the concept of Progressive Taxation, where the tax rate increases as the taxable amount increases.

2. Canon of Certainty

The tax which each individual is bound to pay ought to be certain and not arbitrary. The taxpayer should know exactly:

• The Time of Payment: When the tax is due.
• The Manner of Payment: How it should be paid (online, cheque, etc.).
• The Quantity to be Paid: The exact amount or the formula used to calculate the tax. Certainty protects taxpayers from harassment by tax officials and allows businesses to plan their finances effectively.

3. Canon of Convenience

Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

• Example: Land revenue is often collected after the harvest when farmers have cash on hand.
• Example: "Pay As You Earn" (PAYE) or Tax Deducted at Source (TDS) is convenient because the tax is deducted directly from the monthly salary rather than requiring a large lump-sum payment at the end of the year.

4. Canon of Economy

This canon focuses on the administrative efficiency of the tax. The cost of collecting a tax should be kept to a minimum. If the administrative machinery (salaries of collectors, legal costs, paperwork) consumes a large portion of the tax revenue, the tax is considered "uneconomical." A good tax should take as little as possible out of the pockets of the people over and above what it brings into the public treasury.

PART – C

Q15. Discuss land reforms in India.

Ans. Land reforms in India refer to the institutional changes and policies implemented post-independence to address inequities in land distribution, ownership patterns, and the overall agrarian structure. The primary objectives were to promote social justice by eliminating exploitation, reduce inequality in rural wealth, and enhance agricultural productivity by giving the "tiller" a stake in the land.

1. Abolition of the Intermediary (Zamindari) System

Following independence, the Zamindari Abolition Act of 1950 was one of the first major steps taken. The goal was to dismantle the feudal landownership system where intermediaries (Zamindars) collected high rents from peasants while providing no investment in the land. Ultimately, ownership rights were transferred to the actual cultivators and tenants. This helped break the age-old grip of landlords, though in some regions, Zamindars used loopholes to retain vast tracts of "personally cultivated" land.

2. Tenancy Reforms

To protect those who did not own the land they worked on, various states introduced tenancy reforms for the benefit of the tenants. These reforms ensured tenants were not charged exploitative rates. They were assured with security of tenure, providing legal assurance that tenants could not be evicted at the whim of the landlord, provided they paid their rent. Tenants were given the benefit of the right of ownership, the opportunity to eventually purchase the land they cultivated.

3. Land Ceiling Laws

These laws were designed to address the concentration of land in the hands of a few wealthy individuals. They established a legal limit on the maximum amount of land an individual or family could own; surplus land above this ceiling was acquired by the state and redistributed to landless farmers or those with very small holdings. The effectiveness of these laws was often hampered by "Benami" transactions (land held in the names of others) to bypass legal limits.

4. Land Consolidation (Chakbandi)

Indian farms are often fragmented into small, scattered plots, making modern farming difficult. Consolidation involves rearranging these scattered plots into a single, larger, and more viable land unit. This improves efficiency, allows for better irrigation management, and makes the use of machinery (mechanization) more feasible.

5. Rights for Forest-Dwelling Communities

• Joint Forest Management (JFM): A collaborative model where local communities and forest departments work together to conserve forest resources. It empowers tribal populations by granting them rights over forest produce.
• Forest Rights Act (2006): This landmark act recognizes the legal rights of forest-dwelling communities over the land they have occupied for generations. It includes both individual and community rights to manage and conserve forest resources and access non-timber forest products.

6. Modern Digital Land Records

To modernize administration, the government initiated the digitization of land records. It reduces land disputes, prevents fraudulent transactions, and ensures a clear chain of ownership; simplifying the process of buying, selling, or using land as collateral for bank loans.

Commercialization of Agriculture

Commercialization is the transition from subsistence farming (growing food for one’s own family) to market-oriented production (producing crops primarily for sale). This shift is characterized by the use of modern inputs and the integration of the farm into wider economic value chains.

Key Drivers and Aspects

• Modern Inputs: Farmers adopt high-yielding variety (HYV) seeds, chemical fertilizers, pesticides, and advanced irrigation techniques.
• Specialization: Instead of growing a variety of crops for home use, farmers specialize in cash crops (like cotton, sugarcane, or oilseeds) that have high market demand and profitability.
• Mechanization: The use of tractors, harvesters, and modern farm management tools to increase efficiency and output.

Implications and Impacts

Challenges for Small Farmers

While commercialization offers growth, it also brings significant risks:

1. Market Volatility: Farmers become vulnerable to sudden fluctuations in global or local market prices.
2. Access to Credit: Modern farming requires significant capital. Small-scale farmers often struggle to get loans from formal banks, making it hard to compete with larger commercial farms.
3. Technical Knowledge: Successful commercialization requires understanding complex market dynamics and technical farming practices that many smallholders may lack.

Conclusion

The interplay between Land Reforms and Commercialization is vital. While land reforms aimed to provide equity and security to the farmer, commercialization provided the tools for those farmers to move beyond mere survival and toward economic prosperity. However, for this to be sustainable, modern policies must focus on sustainable farming practices and inclusive market access for small and marginal farmers.

Q16. Evaluate the role of SMEs in the Indian Economy.

Ans. Micro, Small, and Medium Enterprises (MSMEs) are often termed the "Engine of Economic Growth" and the "Backbone of the Indian Economy." They encompass a highly vibrant and dynamic sector that promotes entrepreneurship, sustains livelihoods, and ensures an equitable distribution of national income.

Unlike large-scale industries that are highly capital-intensive, MSMEs are highly labour-intensive. They require a lower capital-to-employment ratio, making them the most effective tool for absorbing India's demographic dividend and preventing distress rural-to-urban migration. They range from traditional village industries (khadi, coir, handlooms) to modern, tech-enabled enterprises producing components for the defence and aerospace sectors.

Role of MSMEs in the Indian Economy

The footprint of the MSME sector in India's macroeconomic landscape is vast and multifaceted. Their contribution can be categorized under the following distinct pillars:

A. Contribution to GDP and Gross Value Added (GVA)

As per recent data from the Ministry of Statistics & Programme Implementation (MoSPI) and the Economic Survey, the MSME sector consistently contributes approximately 30% to 31% to India's total GDP. The sector accounts for roughly 35.4% of the total manufacturing output in the country. They act as critical ancillary units, supplying raw materials, intermediate goods, and components to large-scale heavy industries. During macroeconomic shocks (such as the COVID-19 pandemic), the sector demonstrated a "Resilient Rebound," acting as the scaffolding for India's pursuit of a $5 trillion economy.

B. Employment Generation and Poverty Alleviation

MSMEs are the second-largest employment-generating sector in India, secondary only to agriculture. According to the latest data and records, the sector supports over 20 to 32 crore jobs (inclusive of informal micro-enterprises registered on the Udyam Assist Platform). By providing jobs with minimal capital investment, they absorb the surplus agricultural labour, thereby driving poverty alleviation and stabilizing rural economies.

C. Export Promotion and Forex Earnings

MSME-related products account for an impressive 45% to 48% of India's total overall exports. These enterprises dominate the export share in labour-intensive sectors such as textiles, leather goods, gems and jewellery, pharmaceuticals, and handicrafts. They are increasingly integrating into Global Value Chains (GVCs), facilitated by the "China Plus One" strategy of global manufacturing.

D. Fostering Inclusive Growth and Regional Balance

Because MSMEs do not require massive infrastructure like heavy industries, they can be set up in rural and semi-urban areas. This curbs regional imbalances and decentralizes industrial growth. The sector is a primary vehicle for empowering marginalized communities. A vast number of MSMEs are owned by women, SC/ST entrepreneurs, and rural artisans. The operation of micro and small businesses in Tier-II and Tier-III cities accelerates the penetration of formal banking channels and digital payment ecosystems into remote and rural areas.

E. Fostering First-Generation Entrepreneurs and Innovation

MSMEs lower the barriers to entry for first-generation entrepreneurs. They serve as the breeding ground for grassroots innovation, customized local solutions, and niche manufacturing, which large corporations often overlook due to scale constraints.

Conclusion

For India to achieve its ambitious Viksit Bharat @ 2047 (Developed India) goals, the MSME sector must transition from mere survival to global competitiveness.

1. Shift to Cash-Flow Based Lending: The banking sector must pivot from traditional asset-backed (collateral) lending to cash-flow-based lending, utilizing GST returns and digital footprints (like the Account Aggregator framework) to assess creditworthiness.
2. Regulatory Streamlining: The government must reduce the "regulatory cholesterol" by decriminalizing minor economic offenses and simplifying compliance, thereby incentivizing micro-units to scale up into medium-sized enterprises.
3. Digital Integration: Integrating MSMEs with platforms like the Open Network for Digital Commerce (ONDC) will democratize e-commerce and allow small sellers to reach national markets without relying on monopolistic tech intermediaries.
4. Convergence of Schemes: As suggested by NITI Aayog, multiple overlapping skill development and financial schemes must be converged to prevent administrative leaks and ensure targeted capacity building.

Q17. What are the function of RBI?

Ans. The Reserve Bank of India (RBI) is the central bank of India and the apex regulatory authority for the nation's banking sector. Established on April 1, 1935, under the Reserve Bank of India Act, 1934, it serves as the "Banker to the Government" and the "Banker’s Bank". The RBI’s primary objective is to maintain monetary stability, manage the currency system, and ensure the overall financial health of the economy while supporting economic growth.

Functions of the RBI

The functions of the RBI can be broadly categorized into traditional, supervisory, and developmental roles.

A. Monetary Authority

The RBI formulates and implements India's monetary policy with the primary goal of maintaining price stability (controlling inflation). While controlling inflation, the RBI ensures that there is enough credit available for productive sectors to foster economic development.

B. Issuer of Currency

The RBI has the sole authority to issue banknotes in India, except for the one-rupee note and coins (which are issued by the Ministry of Finance). It is responsible for the design, production, and distribution of currency, as well as the withdrawal of unfit notes from circulation to ensure the integrity of the currency system.

C. Banker to the Government

It maintains and manages the accounts of both the Central and State Governments. The RBI acts as a financial advisor to the government on matters of economic policy, public debt management, and international finance. It provides short-term credit to the government through "Ways and Means Advances" to bridge temporary mismatches in receipts and payments.

D. Banker’s Bank and Lender of Last Resort

Every scheduled bank is required to maintain a portion of its deposits (CRR) with the RBI. The RBI acts as a clearinghouse for banks, facilitating the settlement of inter-bank transactions. In times of extreme liquidity crisis or financial stress, when a bank cannot raise funds from other sources, the RBI provides emergency financial assistance to prevent systemic failure.

E. Custodian of Foreign Exchange Reserves

The RBI manages India's foreign exchange reserves (Forex) to maintain the external value of the Indian Rupee. It buys or sells foreign currency in the market to stabilize the exchange rate against volatility.

F. Supervisory and Regulatory Role

It issues licenses for setting up new banks, opening branches, and conducts periodic inspections of bank operations to ensure compliance with the Banking Regulation Act, 1949. It sets standards for capital adequacy and management to protect the interests of depositors.

Q18. Discuss the key features of the new economic policy 1991.

Ans. The New Economic Policy (NEP) of 1991 was a watershed moment in Indian history. Faced with a severe Balance of Payments (BoP) crisis and soaring inflation, the government moved away from the "License Raj" toward a more market-oriented economy.

The policy is famously summarized by the trio: LPG (Liberalization, Privatization, and Globalisation).

Liberalization: Removing the "License Raj"

Liberalization aimed to end the unnecessary bureaucratic controls that stifled private industry.

• Abolition of Industrial Licensing: Licensing was abolished for almost all industries, except for a few sensitive sectors (e.g., liquor, cigarettes, hazardous chemicals, electronics, and defence equipment).
• Expansion of Production Capacity: Companies no longer needed government permission to expand their production scale or diversify their product lines.
• Financial Sector Reforms: The role of the Central Bank (RBI) shifted from a regulator to a facilitator. This allowed for the entry of private and foreign banks, increasing competition.
• Tax Reforms: Significant reductions in personal income tax and corporate tax rates were implemented to encourage better compliance and higher revenue.

Privatization: Reducing the Role of the Public Sector

Privatization involved giving the private sector a larger role in nation-building while reducing the dominance of Public Sector Undertakings (PSUs).

• Disinvestment: The government sold a portion of its equity in PSUs to the private sector or the general public.
• Reduced Public Sector Reservation: The number of industries reserved exclusively for the public sector was slashed from 17 to just a few (currently limited mainly to Atomic Energy and Railway operations).
• Autonomy to PSUs: To improve efficiency, the government granted "Navratna" and "Maharatna" status to high-performing PSUs, giving them greater financial and operational autonomy.

The Central Public Sector Enterprises are designated with different status. A few examples of public enterprises with their status are as follows:

1. Maharatnas –

• Indian Oil Corporation Limited (IOCL)
• Steel Authority of India Limited (SAIL)

2. Navratnas –

• Hindustan Aeronautics Limited (HAL)
• Mahanagar Telephone Nigam Limited (MTNL)

3. Miniratnas –

• Bharat Sanchar Nigam Limited (BSNL)
• Airport Authority of India (AAI)
• Indian Railway Catering and Tourism Corporation Limited (IRCTC)

Globalisation: Integrating with the World

Globalisation aimed to open the Indian economy to the global market, making it more competitive and technologically advanced.

• Reduction in Tariffs: Import duties and customs taxes were drastically reduced to allow foreign goods to enter the market easily.
• Foreign Investment (FDI & FII): The limit for Foreign Direct Investment (FDI) was raised in many sectors, allowing foreign companies to own a majority stake in Indian ventures.
• Currency Devaluation & Partial Convertibility: The Indian Rupee was devalued to make Indian exports cheaper and more competitive. Later, the rupee was made partially convertible to facilitate easier international trade.
• Removal of Quantitative Restrictions: Limits on the volume of goods that could be imported or exported were largely removed.

Some crucial aspects/outcomes of globalisation are as follows: -

Outsourcing

In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country (like legal advice, computer service, advertisement etc.) Many of the services such as voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching are being outsourced by companies in developed countries to India. Most multinational corporations, and even small companies, are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.

World Trade Organisation (WTO)

The WTO was founded in 1995 as the successor organisation to General Agreement on Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes. WTO is expected to establish rule-based trading regime in which nations cannot place arbitrary restrictions on trade. Its purpose is also to enlarge production and trade of services, to ensure optimum utilisation of world resources and to protect the environment. The WTO agreements cover trade in goods as well as services to facilitate international trade through removal of tariff as well as non-tariff barriers and providing greater market access to all member countries.

India as a member of WTO, has been in the forefront of framing fair global rules, regulations and safeguards and advocating the interests of the developing world. India has kept its commitments towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and reducing tariff rates.

Major Objectives of the NEP

1. Economic Growth: To increase the GDP growth rate.
2. Modernization: To bring in world-class technology and management practices.
3. Fiscal Discipline: To reduce the fiscal deficit and manage the BoP crisis.
4. Competitive Market: To break domestic monopolies and offer better quality goods to consumers at lower prices.

The NEP 1991 shifted India from a "Command and Control" model to a "Market-Driven" model, paving the way for the high growth rates seen in the subsequent decades.

Conclusion:

The new economic policy of 1991 hauled India out of the license-permit-quota raj, breathing new life to the stagnating economy. It was a significant step taken by the government, which launched India onwards onto the path of globalisation. As the LPG regime unleashed itself, a plethora of changes took place. The stronghold of bureaucracy loosened; public-private partnerships emerged loosening the shackles of government over the suffocated private sector.

The process of Globalisation through liberalisation and privatisation policies has produced positive, as well as, negative results both for India and other countries.